Guide to IVAs Are they worth it? doc

IVAs can be a more than welcome release for some people in the right circumstances, but only those who are in se-vere debt crisis looking at bankruptcy as the main alternative.. Under an

Guide to IVAs

Are they worth it?

Introduction by Martin Lewis, Money Saving Expert

My phone rang It was a former colleague She said “just a quick question, I’ve seen these TV ads for IVAs where you can use a loophole to wipe out your debts There’s no problem is there?”

As she was considering an IVA, I assumed she was in major debt crisis so I asked her how big her debts were She said, “about £6,000” At what rate?

“Mostly on 0% cards as you usually suggest.”

I was gobsmacked as she earns £40,000 a year plus, so what on earth was she calling me for? The answer’s simple: the adverts say you can write off 75% of your debts with a legal loophole; she’d seen this and thought it was a good idea What a nightmare! Let me make this plain before we start, in big letters

“IVAs are not an easy get out of de bt They are an alternative to bankruptc y and should only ever be consider ed in that light!”

The problem is the IVA industry is incredibly profitable Take out an IVA and com-panies often make more than £5,000 from it It’s no wonder they advertise this as

an uber-solution with no catches; they make truck loads of cash from selling it to you

So this is a guide to set the record straight, to show you how IVAs work, who they’re for, and how to get one if you need to IVAs can be a more than welcome release for some people in the right circumstances, but only those who are in se-vere debt crisis looking at bankruptcy as the main alternative

Martin

The Guide to IVAs by Martin Lewis & Jennifer Bailey

IVAs in a nutshell

How does it work?

How much do I have to pay back?

What will an IVA cost?

How would an IVA affect my credit file?

Checklist: advantages & disadvantages

How to choose an IVA provider

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1 IVAs in a nutshell

IVA stands for ‘Individual Voluntary Arrangement’: a legally binding contract between you and the bank or credit card company Under an IVA, your debts are frozen and you make

a formal proposal to settle your debt within a set period, usually five years This usually means paying at least £200 a month After this the rest of the debt is written off

The main advantage of IVAs over bankruptcy is you’re more likely to keep your house and other assets, such as your car Plus, after the IVA has ended, the restrictions are less severe than they are for someone who has been bankrupt – though they’re still tough Don’t be taken in by the aggressive ads on TV and in the red top newspapers; an IVA is a serious measure, designed for those with limited alternatives There’s been an explosion

in the number of IVA firms, making serious cash from the fees they charge The Office of Fair Trading has been clamping down on them and has ordered several firms to change misleading IVA adverts

IVAs aren’t for everyone Leading debt help charity the Consumer Credit Counselling Service recommended IVAs to only 3% of people with serious debt problems in 2006 There’s a real danger that taking out an IVA unnecessarily will leave you facing the prospect of bank-ruptcy anyway, despite having laid out £1000s in set-up fees

This guide will explain in detail how an IVA works, and help you work out if you should or shouldn’t think about getting one

Where can I get help?

If you are struggling to make even the minimum repayments on your debts and think

an IVA might be an option you must get personal advice before signing up Yet equally important is who this advice comes from; you need non-profit debt counsel-ling help, in other words a one-on-one session with someone who is paid to help you, not make money out of you This is different to ‘free’: many commercial com-panies say they’re free as you’re not charged directly, but you’ll still pay somehow The three major places are: The Consumer Credit Counselling Service

www.cccs.co.uk Telephone: 0800 138 1111, National Debtline

www.nationaldebtline.co.uk Telephone: 0808 808 4000, and your local Citizens Advice

Bureau www.citizensadvice.org.uk

These counsellors use a variety of techniques; among other methods you may be put

on a debt management plan, where they negotiate with your creditors You may also

be recommended an IVA or bankruptcy They will show you how to prioritise the most important debts to enable you to keep food on your table and the roof over your head

Who can take out an IVA?

IVAs were introduced in 1986 and were originally designed to offer small businesses with financial problems an alternative to bankruptcy

Yet nowadays an IVA can be taken out by anyone who lives in England, Wales or Northern Ireland, with unsecured debts of (usually) at least £20,000 IVAs aren’t available in Scotland, where the nearest equivalent is something called a Protected Trust Deed There’s more information about these on the Scottish Executive website

www.scotland.gov.uk/Topics/Justice/Civil/17868/10393.

To get an IVA you need a stable income and will usually have assets, like a house or car Not all debts can be brought into an IVA The main ones that can are overdrafts, personal loans, credit and store cards, catalogue debts and student loans You can also include tax

or VAT owed to HM Revenue and Customs, though it may be given priority

However, mortgages and other loans secured on your property can’t be part of an IVA Neither can rent and council tax arrears, magistrates court fines, speeding or parking tick-ets and maintenance or Child Support Agency arrears These normally have to be paid,

so separate arrangements will need to be made for these

How can I set one up?

An IVA is a legally binding agreement so you can’t set one up on your own You’ll need the help of an Insolvency Practitioner (IP), usually an authorised accountant or solicitor, who’ll look at your situation and do a deal with the creditors for you After the IVA’s up and running, it’s their job to supervise it

First the IP will look at your assets and income and work out how much you can afford to pay as a lump sum and/or in monthly payments Be completely honest about your circum-stances They’ll then put together a proposal to show to your creditors; you’ll be asked to sign this and confirm it’s the best offer you can make The IP will also explain your other options such as bankruptcy, to make sure that an IVA is the best route for you

If you decide to go ahead, your IP will apply to the county court for an ‘Interim Order’ This stops your creditors from starting bankruptcy proceedings or taking any other action against you without the court’s permission

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Since 2003 it’s been possible to make an IVA proposal without applying for an Interim Order first This can reduce costs but means creditors can still take enforcement action against you until the IVA is agreed

Whether or not your IP has asked for an interim order, the next step is to send the proposal

to your creditors who are asked to vote on it at a creditors’ meeting If 75% of your credi-tors ‘by value’ vote for the IVA to go ahead, it becomes binding on all credicredi-tors, even those who did not agree to it

‘By value’ means the creditors to whom you owe 75% of your total debt, not 75% of the creditors by number Hence if the company which is owed the most money votes against the proposal, the IVA will often fail

If they do agree, interest is frozen for the duration of the arrangement and creditors are not allowed to contact you about the debts A standard IVA lasts for five years or 60 months

As long as you make all 60 monthly payments, at the end of the period the rest of the debt

is cancelled

Many adverts for IVAs tout them as “get out of jail free” cards, promising that you’ll be able

to wipe out a large proportion of the money owed The Office of Fair Trading has criticised adverts which falsely claim that ‘up to 90%’ of your debt may be written off, when a more realistic amount is closer to 60%

The fact is that creditors will only agree to an IVA if they’re convinced that they’ll get back more money this way than by making you bankrupt, so it is important to understand that

an IVA’s likely to mean having to stick to a strict budget for five years For more tips on managing your money go to www.moneysavingexpert.com/budgetplanner

Under most IVA’s, you pay back 30p per pound owed, although some banks have recently started refusing deals which offer less than 40p to 50p per pound As a rule of thumb, you should expect to pay at least £200 a month

Therefore, a bank’s ideal IVA candidate is someone with a stable income, with enough spare cash after ‘essential’ spending to be able to afford this amount

Yet most banks take a pretty hard line on what counts as ‘essential’ Holidays, clothes, gifts and gym membership are usually regarded as luxuries, so won’t count towards your budget

What about my car and house or other assets?

Unlike with bankruptcy, as long as you have enough income to make the monthly pay-ments, you should be able to protect your house and other assets

Yet while you won’t have to sell your home, you may have to give up a big proportion of your ‘equity’, the share of it you own Creditors can ask you to remortgage and release

up to 75% of your share If you have no equity or are in ‘negative equity’ (that is, you owe more than the property is worth) at the start of the IVA, your creditors may demand that the home is re-valued in the fourth year After that, you may have to give up a proportion

of the equity you then have

If you have an endowment policy linked to your mortgage you’re likely to be asked to cash it in and add the proceeds to the arrangement Plus if you have any savings you’ll probably have to hand these over as well.

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3 How much do I have to pay back?

If you’ve a car but can show that you need it for work, you are unlikely to have to sell

it Yet if you’re in the middle of paying the car off under a hire purchase deal, you

can’t include this debt in the IVA, as the finance company could just repossess the car Normally you’ll be allowed to keep making monthly payments towards the car (assuming you can afford them), yet when the finance deal ends you’ll need to pay the extra money into the IVA instead

And although an IVA has no impact on your state pension, if you’ve a private pension it might be affected In some cases creditors may ask you to stop making contributions over the period, and add the amount to your monthly IVA payment instead Not all pen-sion schemes will allow you to freeze your payments for five years but if yours does allow

it you may have to

A Martin's Money Moment

If you're in debt you’re not alone MoneySavingExpert.com has a special

community of people in various levels of debt (from bankrupts to limited credit card overspending) all working together and supporting each other to get debt free.

The Debt-Free Wannabe board, which is part of the site's forum, has supported hundreds of people though similar situations The first step is to post your

S.O.A (Statement of Affairs) to let others who are also in debt and have been through the same issues, pick through your finances.

I've never yet seen a debt case that isn't solvable; it might not be quick and

easy, but there's always a route.

IVAs tend to cost less than bankruptcy proceedings.

Your Insolvency Practitioner will charge two fees: a ‘Nominee Fee’ for preparing and proposing your IVA, and a ‘Supervisor Fee’ to run it The nominee fee is usually around

£2,500 with an annual supervisor fee of about £1,000 per year that the IVA lasts In total, therefore, an IVA typically costs around £7,500 – hence why IVA providers try to flog them like crazy and why they’re not for people with small debts

The charges work differently at different companies, yet usually you won’t have to pay the fees yourself - instead they’re deducted from your monthly payments This can mean that almost all of the first few years’ payments into the IVA are swallowed up by the IP’s fees and do not actually go towards paying off any of your debts

Make sure you understand what and how your IP will charge you for the IVA Some IPs and debt management firms will offer a free consultation to discuss your circumstances Take advantage of this if you can Yet beware that some debt management firms will charge you for this whether or not your application for an IVA is successful

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What will an IVA cost? 4

A Martin's Money Moment

A quick rant about fees

It’s worth focusing again on how much IVA companies make This often

means they have a vested interest in trying to set one up, which means the

advice you get could be skewed towards getting an IVA again It’s for this rea-son I revert back to what I said earlier

If you are thinking about getting an IVA getting independent advice from a

non-profit debt counselling agency is a must Far too many people go straight

to IVA companies, which purport to offer “free debt counselling” and guess

what they end up suggesting? An IVA Big surprise eh?

What if my financial circumstances change during the IVA?

You must tell your supervising Insolvency Practitioner about any changes to your financial situation during the IVA period They will also reassess your income and expenditure at least every year to make sure that the monthly payments are still the most you can afford to contribute If your income increases, your supervisor can ask for some of the extra money

to be added to your monthly payments

Sadly, your IVA is likely to have a clause which says any windfalls, such as lottery wins, bonuses, gifts or inheritances, also have to be declared to your supervisor and paid into the IVA This will happen even if you inherit an amount of cash greater than the amount

you’re due to pay back If it meant you could then afford to clear all your debts you’ll have

to do so

If your financial situation gets worse during the IVA - perhaps because you fall ill or lose your job - you must advise your IP asap The whole point of an IVA is that you commit to making payments for 60 months - failing to make even one could ruin the agreement

In an emergency it’s possible you might be allowed to miss up to two payments, yet only with permission from your supervisor and your creditors If you miss payments without their say-so, then you’ll be considered ‘in default’ and could then be made bankrupt, meaning having to sell your home

If the change in situation is permanent, then in some cases your IP can work out what you can now afford and, if necessary, ask your creditors for a lower payment There’s no guar-antee they’ll say yes

Thus it is absolutely crucial that the payment amount agreed when the IVA is set up is realistic If you don’t think you’ll be able to keep up payments for the whole period then an IVA’s not the right option for you